Sooner or later, most businesses will be sued by one of their
employees.
Most of these suits would not be brought without two essential
ingredients--a
motivated employee and a triable case.

In order to avoid lawsuits, you systematically look at each of the
areas
that most often cause problems and implement practices that are
designed
to avoid motivating the employee and to make the case against you
untriable
by establishing and documenting your defenses. Problem areas that
should
be examined include claims for wrongful discharge, unpaid leave or
overtime,
defamation, and discrimination or sexual harassment.

1. How
to Avoid Motivating the Potential Litigant.

Many people live their entire lives without ever suing anybody. When
an employee goes to see a lawyer, it generally means that the litigant
is truly angry, or has dollar signs in his eyes, or both. Therefore, by
treating your employees fairly and with respect, and by implementing
sound
procedures that will keep you from presenting a tempting target, you
can
avoid many potential lawsuits. The specific ways that you do this are
covered
below in connection with each of type of claim.

2. How
to Discourage a Plaintiff's Lawyer

People generally do not bring their own lawsuits. Nor will most of
your
employees have enough money to pay a lawyer $100 to $200 per hour to
prosecute
their claims through the courts. This means that the vast majority
claims
that are brought against employers are being brought by lawyers who
have
agreed to take the case for a contingent fee.

Lawyers generally are not willing to invest the time necessary to
pursue
a case for a contingent fee unless they think they have a good chance
of
winning and the prospective damages are substantial. Therefore, if you
can make the potential cases against you look like losers to a
plaintiff's
lawyer, you can usually avoid a lawsuit.

3. How
to Preserve and Document Your Defenses

You make the case against you look like a loser by preserving and
documenting
your defenses. Below we will explain how to do this in the context of
some
of the most common claims. However, there are some general principles
that
may be helpful.

Everyone will tell you to have thorough documentation. However, this
advice will not help you with the two really tough issues: what to
document
and how much documentation is needed.

4. What
to Document

Documentation is a two edged sword. It is common knowledge that your
own documents can be the most damaging evidence against you in a
lawsuit.
There is no way to avoid the chance that one of your documents will end
up hurting you. However, you can minimize this risk by knowing what to
document.

You document your defenses, that is, the facts that show that, in
each
case, you acted fairly and properly. For example, you would document
the
fact that you gave a warning, that you specified consequences for
noncompliance,
that you did not make any promises, that you made an accommodation for
a disabled employee, that harassment is forbidden in your company, that
you did an investigation of a complaint, and that you had a good reason
for discharging an employee.

While you do not create records that are misleading by omission, you
need not and should not go out of your way to document obviously
adverse
facts. You should most especially not document your unspoken fears,
conjectures,
speculations, and doubts.

For example, if you are at a meeting at which a problem is being
discussed,
do not record what was said by the participants. And most especially do
not record your concerns. You would be amazed at how many people take
notes,
which will probably have to be given to opposing counsel, that say
things
like "uh oh, we may have a problem here" or "could be a disaster." With
documentation like that, it probably will be.

However, if your company is following sound procedures, it is best
to
assume that documentation is desirable, unless that is obviously not
the
case.

5. How
Much Documentation is Needed

Once you have decided that a fact should be documented, you have to
decide how much documentation is enough. To do that you use DiCarlo's
law
of documentation, which states that the amount of documentation that is
needed for any fact is in direct proportion to the amount of danger
inherent
in being unable to prove that fact. In other words, the more risk, the
more documentation.

The lowest level of documentation is internal memoranda, records, or
notes. These may be sufficient for many routine purposes, such as a
first
warning to an employee about a tasteless joke.

Higher risk means more documentation. The second level of
documentation
is a document that you give to the employee, like a letter or a
memorandum
to the employee confirming your warning about a more serious problem.

High risk requires a high degree of documentation. The third level
of
documentation is a document that the employee signs, like an employment
agreement, an annual acknowledgment, an evaluation, or a memorandum
about
a situation that may result in discharge or disciplinary action. For
certain
kinds of meetings, you will want to have a second manager present as an
additional witness.
Your instincts, if you learn to pay attention to them, will
usually be a good guide to when you are dealing with a risky situation.

HOW NOT TO GET SUED BY AN
EMPLOYEE

1. The
Four Most Common Ways to Get Sued

The four most common kinds of claims by employees are for wrongful
discharge,
claims for unpaid leave and overtime, defamation, and discrimination
and
sexual harassment. We will examine each one in turn below.

2. Your
Friend the Annual Acknowledgment

The most useful single document for avoiding a lawsuit by one of
your
employees is an annual written acknowledgment.(2)
Plaintiffs' lawyers hate employee's acknowledgments, and with good
reason.
A good recent acknowledgment cuts off many of their favorite theories
at
the knees, and can prevent them from even taking a case, let alone
filing
a suit. It can also give you grounds to win the case before trial by a
motion for summary judgment. Haggard v.
Kimberly Quality Care, Inc., 39 Cal.App.4th 508 (1995).

A good acknowledgment should have a preamble and should cover at
least
the following areas: receipt of the employee manual, the at-will
employment
relationship, the lack of any promises of tenure or advancement, the
lack
of uncompensated overtime, the amount of any accumulated leave, and the
lack of any discrimination or harassment.

The preamble should say that the employee need not and should not
sign
the form unless the statements in it are completely true and accurate.
It should instruct the employee to talk to certain specified officials
of the company before signing the acknowledgment if any changes or
corrections
are necessary to make it completely accurate.

After the preamble, the employee acknowledges that he has received
the
office manual effective as of a certain date, and that he understands
that
it is his responsibility to familiarize myself with the information,
procedures,
and policies described in that manual. The employee agrees to abide by
the principles and practices explained in the manual, and to contact
certain
specified officials of the company if he has any questions about its
contents.
The employee acknowledges that the policies and procedures contained in
the manual are subject to change, and that the manual is not intended
to
be and does not constitute a contract of employment.

The employee then acknowledges that no promises or assurances of any
kind were made to him to accept or to continue his employment, that he
knows that no one is authorized to make any such promises, and that any
such promises could not reasonably be relied upon.

Next, the acknowledgment says that the employee understands and
agrees
that his employment is "at will," which means that either the Company
or
the employee may terminate the employment at any time that either of
them
desires
it, with or without any reason, and that no written or oral promises,
assurances,
or representations to the contrary, whether express or implied, have
been
made to him at any time, whether before or during his employment.

Overtime and leave come next. The employee warrants and represents
that,
since he was first employed by the company, he has not worked any
overtime
that he has not reported in writing to certain designated officials of
the company and that, as of the date of the acknowledgment, he has not
worked any overtime, holidays, or other time in addition to normal
office
hours for which he have not already been properly compensated at the
proper
overtime rates. He states the number of hours of untaken leave he has
accumulated
as of the end of the last completed pay period.

Finally, the acknowledgment deals with discrimination and
harassment.
The employee warrants and represents that, since he or she was first
employed
by the company, he or she has not been the victim of, or witnessed any
evidence or indication of, any form of harassment or discrimination at
or by the company based upon race, color, religious creed, sex
(including
gender harassment, and harassment due to pregnancy, childbirth, or
related
medical conditions), marital status, age, national origin, physical or
mental disability, or ancestry, other than any incident that he or she
may already have reported in writing to certain designated officials of
the company. As to any incident that the employee may have reported,
and
of which the employee may have been the victim, the employee
acknowledges
that he or she has been informed of the outcome of the company's
investigation
into the matter.

The acknowledgment should be signed by the employee and a
supervisor,
who will then be able, if necessary, to testify to its due execution,
and
should be kept in the personnel file for at least four years after the
employee leaves the company.

You should have your lawyer prepare or review your form
acknowledgment
to make sure that it is complete and does not contain anything that can
be used against you.

No document, and no other preventive measures, can completely
eliminate
the risk of getting sued. However, if you take the time to prepare a
thorough
employee acknowledgment, use it consistently, and keep the executed
copies
in a safe place, it can be the cheapest and most effective lawsuit
repellent
that you ever obtain.

3. How
to Keep Your Employee Manual from Biting You
Your employee policy manual can either be your best friend or your
worst
enemy, depending on what's in it. Most businesses have an employee
manual,
but many of them simply use whatever form the get from a book, a
friend,
or the internet. They fail to analyze their manual carefully to make
sure
all the essentials are included and the booby traps are excluded.

If you are sued by an employee or ex-employee, you can be sure that
his lawyer will not be so casual about what you have put down in black
and white. Now is your chance to make sure that the hostile lawyer
won't
like what he sees! If you follow a few simple rules below for improving
your policy manual now, you may be able to avoid a lawsuit entirely, or
at least substantially strengthen your position in case you are sued.

Every employee manual should include a prominent disclaimer saying
that
it is not and does not constitute a contract of employment. Many a
lawsuit
is brought by an ex-employee who claims that some provision or other in
an employee policy manual constituted a binding commitment that was
breached
by the company.

Then, go through the manual and systematically strengthen the
documentation
of your at-will employment relationship. The at-will relationship is
your
first line of defense in any wrongful termination lawsuit, and you
should
bolster it wherever and whenever you can.

Start by including a general section affirming the right of both the
employer and the employee to terminate the employment at will either
with
or without notice, and the employer's right to change the conditions of
employment at will. Add a statement that no one in your company is
authorized
to represent anything to the contrary, except in a formal written
contract
of employment that is signed by a designated officer. Finally, require
employees to report any instances of unauthorized promises or
representations
to the contrary.

Repeat the at-will affirmations in connection with each specific
area
in which there is a danger of drawing an inference of anything but a
pure
at-will relationship. For example, if you have grievance procedures,
include
a statement that those procedures are subordinate to both parties'
right
to terminate with or without notice and with or without cause. If you
have
lists of prohibited activities or activities that may lead to specific
disciplinary actions, say that those consequences are neither exclusive
nor meant to preclude other or more drastic action.

Don't stop yet. If you have probation provisions, say that
completing
probation does not alter the at-will relationship. If you have lists of
factors that may be considered in decisions about promotions, say that
the listed factors are given as examples only, are not mandatory or
exclusive,
and are not meant to constitute a promise of promotion or continued
employment.
Keep going through the manual until you have identified and neutralized
all similar potential problem areas.

Next, start at the beginning and go through the entire manual again
looking for and eliminating anything that is superfluous or
unnecessary.
There is always a chance that even the most seemingly vacuous drivel
will
come back to bite you, so don't say anything without a good reason. As
you go through the manual, look for phrases like "employer shall" and
"employer
will." Change all the "shalls" and "wills" to "mays." Look for any
language
that could be tortured and twisted by an crafty plaintiff's lawyer into
a promise or commitment and take it out.

Once you have given your manual a thorough going over, there are
still
a few more necessary tasks to complete. Many businesses with perfectly
adequate policy manuals run into a buzz saw because they fail
consistently
to implement these three simple but essential followups.

First, you should carefully review and update your employee manual
at
least once a year. Second, you must be have records that will enable
you
to determine and produce a copy of the exact version of the manual was
in effect at any given time. Therefore, you the cover of each manual
should
include an effective date and you should keep each succeeding version
of
the manual in a chronological file.

Third, you should distribute the manual to all your employees and
get
an signed acknowledgment from each of them at least once a year. The
acknowledgment
should say that the employee has received and read the policy manual
effective
as of the date on the cover, that the employee understands that it is
his
responsibility to familiarize himself with the information, procedures,
and policies described in that manual, and that the employee agrees to
abide by the principles and practices explained in the manual.

The acknowledgment should go on to say that the employee understands
that he should contact certain designated officers of your company if
he
should have any questions or need clarification as to the content or
interpretation
of the policy manual. Finally, the acknowledgment should say that the
employee
understands that the policies and procedures contained in the employee
manual are subject to change, and that the manual is neither intended
to
be, nor does it constitute, a contract of employment.

By the way, the annual written acknowledgment can and should do a
lot
more than bulletproof your policy manual, and a future column will be
devoted
entirely to how to make the most of such one. Nothing you do can
eliminate
all risk of being sued. However, if you carefully follow the steps
above,
you can at least be confident that you will not ambushed by your own
policy
manual.

4. How to Hire and How to
Fire
Hiring and firing well can go a long way toward not motivating a
potential
litigant. You do this by not hiring people that you will be likely to
have
to fire, by not surprising your employees, by avoiding procrastination
when disciplinary action becomes necessary, by conducting a sound exit
interview, and by getting a release. We will deal with each of these
things
below.

5. How to Hire

It should be obvious that the better you hire, the fewer problems
you
are going to have. Therefore, one of the most important ways you can
avoid
being sued by an employee is to hire good employees. Do not be seduced
by the availability of probation periods to hire marginal persons in
the
fond hope that it things might work out. Remember the rule that more
than
90% of all mistakes in judgment are due to wishful thinking.

When you hire you should always use an employee application and all
job references. You also should check litigation databases to see
whether
the employee has sued his previous employers! Now that you can get this
information on the internet in five minutes either cheap or for free,
there
is simply no excuse not to do so. If you don't know how, ask your
lawyer.
If he doesn't know how, get another lawyer.

While it is important to gather relevant and proper information
about
prospective new hires, it is equally important to avoid inquiring into
protected status issues. Don't ask about an applicant's marital status,
health, or childcare arrangements.

If you want to do drug testing, you should consult your lawyer. Such
testing is sometimes permissible, and sometimes impermissible depending
on the circumstances and the nature of the job. Also, the law in this
area
is developing. However, in general, it is easier
to justify pre-employment testing than post-employment testing. Loder
v. City of Glendale, 14 Cal.4th 846 (1997).

6. Avoid
Procrastination

Someone who has been working for you for a long time is much more
likely
to sue you for being terminated. Usually, the problem employee realizes
that he or she is in disfavor, and procrastination causes a buildup of
resentment. Longevity is also, a factor that can be used by a court or
a jury as a basis for finding that an implied in fact contract.
Moreover,
procrastination gives you more time to make a mistake, and it carries
with
it a risk of enhanced damages for emotional distress.

By far, the best time to terminate is during the initial
probationary
period right after hiring. Therefore, you should not extend the
probationary
period without a really good reason and you should not keep a
questionable
employee past the initial probationary period in the hope that he or
she
will improve. If, after the initial probationary period, and after a
fair
warning, the employee fails to bring his or her performance up to a
specific
standard, end the employment. Do not let a bad situation drag on for
months
and years while the employee rankles and dreams of sweet revenge.

7. How
to Conduct a Safe and Effective Exit Interview

Exit interviews are useful, and should be done whenever an employee
leaves your company, whether voluntarily or not. They are also
dangerous.
It is therefore important that the managers who are responsible for
conducting
your exit interviews have a clear idea of the matters that need to be
covered,
the things that it is ok to say, and the things that, if said, may get
you into a lawsuit.

Because they are the most troublesome, we will focus on exit
interviews
of employees who you have discharged. It is best to have at least two
managers
present at such an interview in case there is a dispute about what went
on in it.

First, tell the departing employee that the company has decided to
terminate
his employment due to unsatisfactory performance, tardiness, failure to
follow instructions, reduction in force, or other specified reasons
that
have been preapproved by your lawyer. You should always have, and be
able
to document, a factually solid, sensible reason for terminating an
employee,
regardless of whether or not the employment was at will.

Even if you don't consult your lawyer every time that you discharge
an employee, you should ask him about any reason that you may have that
is not on the list above. You need to be sure that you don't fire
someone
for a reason that is improper or that can easily be made to look
suspect.

Remind the departing employee of your previous discussions, if any,
with him concerning the problems for which he is being terminated. Tell
him, if applicable, that, as a result of the lack of sufficient
improvement
in the relevant areas, you cannot continue his employment.

If, as you should, you are offering the employee a severance package
that contains releases of liability, tell him that you are willing to
offer
him a severance agreement that would give him certain benefits. Then
give
the employee your standard termination letter,(3)
the severance agreement, and an extra copy of the usual COBRA notices.
The COBRA notice must also be sent by mail within 14 days.

Give the employee the booklet from the California's Employment
Development
Department concerning unemployment benefits. If you don't have this,
you
can get it from EDD or your lawyer.

Listen carefully and patiently to what the employee has to say,
especially
including any complaints he may have. If he expresses disagreement with
the reasons for his termination, ask him why he thinks that, and later
consider what response may be appropriate, perhaps in consultation with
your lawyer. Do not argue with him. Simply say that you are sorry that
you do not agree with him and are surprised at any untrue statements
that
he may make.

Ask the departing employee whether he has any documents or records
belonging
to the company, including lists of clients, and arrange for their
return.
Remind the employee that he has a continuing obligation to maintain the
confidentiality of the company's business after his departure. Make
arrangements
for the employee to remove his personal belongings at your mutual
convenience.

Ask whether the employee's records relating to compensation are up
to
date. These might include records relating to sales or leave taken.
Tender
the employee a check for all accrued compensation, including any
accrued
salary, leave time, vacation time, commissions, or other amounts that
may
be due. If there is any disagreement about compensation, tender the
amount
that you believe you owe, and offer to get back to the employee as to
any
disputed amount.

There are certain things that, while not necessary, probably won't
get
you in trouble. For example, It is ok to express your regret that
things
did not work out well enough for you to continue the employment of
departing
employee. It is also ok to remind him of any efforts that you made to
help
him to meet your requirements. You may wish him good luck.

Other things are not ok, and may be expose you to litigation. Do not
argue with the employee. It is useless, creates bad feelings, and may
cause
you to say something that you will heartily regret hearing repeated in
court.

Do not tell the departing employee or suggest to him in any way that
he is incompetent or dishonest. This is important since such statements
may form a basis for tort liability for defamation. Do not suggest that
the amount or timing of payment for accrued compensation depends on
whether
he signs the severance agreement.

Do not promise the employee anything that is not described above,
for
example, a good recommendation or help in getting another job.
Recommendations
or references can be a thorny area that involves potential liability to
suit, so if someone asks for one you should consult with your lawyer
about
what your policy should be on the subject. Randi
W. v. Muroc Joint Unified School Dist., 14 Cal.4th 1066 (1997)
(former
employer held liable for negligent recommendation where teacher
sexually
molests student at new job); Jensen v. Hewlett-Packard Co., 14
Cal.App.4th
958, 965, 18 Cal.Rptr.2d 83 (1993) (libel action may be based on false
accusations in employee evaluation form of criminal conduct,
dishonesty,
incompetence, or reprehensible personal characteristics or behavior); Marshall
v. Brown, 141 Cal.App.3d 408, 412, 190 Cal.Rptr. 392 (1983)
(wrongful
interference liability based on negative comments in former employer's
evaluation letter).

Do not give a false reason for the termination, or deny the true
reasons.
People sometimes are tempted to do this out of a misguided desire to
avoid
hurting the departing employee's feelings. You should resist that
temptation.

If anything unanticipated or troublesome comes up, or the employee
accuses
you or a fellow employee of some kind of improper behavior, such as
improper
discrimination or harassment, postpone any response until you have had
a chance to carefully consider the information, perhaps in consultation
with your lawyer. Don't try to improvise a response.

A carefully structured, well thought out exit interview can ensure
that
you carry out necessary transitional tasks, end the employment
relationship
without unnecessary hard feelings, and help to keep you out of court.
It
should be part of every employer's regular practice.

CLAIMS
FOR WRONGFUL TERMINATION AND HOW TO AVOID THEM

As with all claims, you avoid claims for wrongful discharge by not
motivating
the employee and by making the case untriable. For wrongful
termination,
you do this by preserving and documenting the "at will" relationship,
by
using the probationary period to discharge employees who are not fully
satisfactory, by documenting the existence of good cause for any
adverse
personnel action, by documenting the lack of bad cause, and by getting
a release if you can.

A case for wrongful discharge can be brought under many different
legal
theories, and the usual complaint contains at least several of such
theories.
The usual ones are Formerly, punitive damages were available. Foley
eliminated punitive damages for claims for breach of contract, making
this
these claims attractive to plaintiffs. However, compensatory damages
are
still available under the contract theories, and punitive damages are
still
available for many of the noncontractual theories. Damages for
emotional
distress are also available under certain theories.

The most common legal theories are breach of express contract,
breach
of implied contract, breach of the covenant of good faith and fair
dealing,
negligent or intentional infliction of emotional distress, fraud, and
defamation.

Claims for breach of express contract may be oral or written, and
may
be based on personnel manuals or memoranda or a job application.

Claims for breach of implied contract may be brought where the
circumstances
give rise to reasonable expectation of tenure on good behavior. Implied
contract theories are strongest where the employee has been working for
the company for a number of years, though long service is not a
prerequisite.

The covenant of good faith and fair dealing is implied in law into
every
oral and written contract in California. Claims for its breach are
therefore
a species of claim for breach of contract. The main significance of
this
covenant is that, until recently, breaches of this particular covenant,
unlike the others in the contract, was considered to be grounds for
punitive
and other tort damages. The covenant of good faith and fair dealing
does
not convert an at will employment relationship to employment on good
behavior.

Negligent or intentional infliction of emotional distress can be
based
on virtually any kind of behavior that is considered to be unkind or
improper.
Therefore, avoiding this claim is usually a matter of not doing
something
that will be seen as cruel or oppressive by a judge or jury.

Fraud usually comes into complaints for wrongful discharge in the
context
of allegedly untrue statements or insincere promises that were made to
the employee in connection with his employment. A plaintiff's lawyer
will
often stretch to bring in a claim for fraud because, it carries with it
the possibility of both punitive damages and damages for emotional
distress.

Until recently, defamation claims were fairly common in complaints
for
wrongful discharge. There were two common kinds of defamation theories.
One was that, in the course of deciding to fire the plaintiff, his
supervisors
talked about him to each other and to the other employees about the
cause
for the discharge, thereby defaming him. This theory is no longer as
common
because of recent appellate cases that say that such internal
statements
are privileged where they are limited to persons who have
responsibility
for making the personnel decision and there is no evidence of bad
faith.
See,
e.g., Cuenca v. Safeway San Francisco Employees Fed. Credit Union,
180 Cal.App.3d 985 (1986).

The second common defamation theory was based on unfavorable
statements
made by the former employer when it was called by potential new
employers.
While there have been some legal inroads into this theory, it is still
alive and well. Robomatic, Inc., v.
Vetco
Offshore, 225 Cal.App.3d 270 (1990). Therefore, when
called
by a potential new employer about a former employee, the safest course
is, as a uniform matter of policy, only to confirm the position or
positions
held and the dates of service.

Luckily, you don't need to know all of the details of each legal
theory
that may be used by a potential litigant in order to take sensible and
effective steps to avoid being sued. Likewise, we will not belabor the
obvious, by dwelling on the need to tell the truth in your business
dealings.
Nor will we assume that you have nothing else to do in your business
than
try to avoid litigation. Rather, we will discuss practical and
nonobvious
measures that can really do you some good, without absorbing an
unreasonable
amount of time and effort.

We have already talked about how to avoid motivating the employee by
not hiring people that you will be likely to have to fire, by not
surprising
your employees, and by avoiding procrastination when disciplinary
action
becomes necessary. Now we will talk about how to make the former
employee's
case untriable, beginning with conduct of the internal investigation.

1. How
to Conduct an Internal Investigation that Won't Backfire

There are many circumstances in which your business may need to
conduct
an internal investigation. Since one of the most common such situations
is the an investigation of a complaint of sexual harassment, we will
use
that as an example.

a. Privileges

You should consider involving your legal counsel at an early stage
of
any internal investigation where there is an indication of a serious
problem.
This can be important if there is a later lawsuit.

If your internal investigation is properly conducted by a lawyer or
under his supervision, some or all of the written materials and
communications
related to the investigation may be protected from future disclosure to
parties adverse to you by attorney-client privilege, the attorney work
product rules, or both.

Communications between your lawyer and an agent of the company may
be
subject to attorney-client privilege. This privilege is, in some
respects,
narrower than work product protection. However, it is absolute: if it
exists
and is not waived, an adverse party cannot get the substance of the
communication
no matter how great its alleged need for the information. In order to
avoid
waiving the privilege, the privileged communication must not be
disclosed
to anyone other than the attorney and the client. In the case of a
corporation,
this means that only the corporate agents responsible for seeking
advice
from the lawyer should be privy to their communications.

Second, communications between the company and the lawyer should be
segregated from other material that may not be privileged or whose
attorney-client
privilege may later be waived.

Other material that is developed in the investigation, because it is
being done by your lawyer or under his supervision, and in
contemplation
of possible litigation, may enjoy limited protection as attorney's work
product. Examples would be notes of interviews with witnesses. This
information
could be obtained later in litigation by order of a judge under certain
circumstances.

In order to maintain these privileges, you should segregate any
notes
or other documents that you generate in the course of this
investigation
in a separate file. Mark each document that was prepared specifically
for
the lawyer's review "Privileged and confidential communication for
legal
counsel only." Keep communications to the lawyer separate from other
material,
such as your notes, that may enjoy only work product protection.

You should do your best to maintain all applicable privileges.
However,
it is best to assume that there is some possibility that anything that
you write down will eventually fall into the hands of any eventual
opponents.
Therefore, it is important to make records only of matters that are
necessary
and pertinent. Please do not record your mental impressions, guesses,
opinions,
conclusions, and so on.

b. Goals

The goal of, say, an investigation of a complaint of sexual
harassment
is to conduct a fair, thorough, and expeditious inquiry into the
complaint,
to determine whether anyone involved has been guilty of any misconduct,
and to determine any additional facts that may be relevant to your
determination
of what action is necessary or desirable with respect to any of your
employees.

c. Procedures

In order to respect the privacy of the parties, and to ensure a
timely
completion of the investigation, it is important to attempt to avoid
straying
from issues that are relevant to these goals. In particular, you should
avoid any unnecessary inquiry into anyone's religious beliefs or
theories,
private sexual practices or activities, or other personal business. You
should make your desire to avoid unnecessary prying clear to the
witnesses
who are interviewed and try to keep our interviews focused on the
issues.
Because of the nature of the issues that have been raised, this will
require
tact and judgment.

Two officials of the company should be present for each interview.
One
of them should conduct the interview and the other should take careful
notes, which should not be shown to anyone but responsible officials of
the company and your lawyer. In order to avoid the appearance of
ganging
up on the interviewee, the note taker should not ask questions. If the
note taker thinks of a question that should be asked, she should make a
note of it and discuss it with the questioner during a break.

If a witness expresses a desire to leave, or declines to answer
certain
questions, you should tell him that, while you cannot require him to
cooperate,
to the extent that he does not cooperate you may be forced to make
whatever
decisions are necessary without the information that you are unable to
obtain from him. If the witness wants to take a short break, you should
of course comply. It is important to be polite and tactful, regardless
of any provocation, so that the interview process itself does not
become
part of someone's complaint.

In an investigation like this, there is a danger of making yourself
subject to a claim for defamation. Therefore, it is important not to
repeat
charges that may have been made against a person or unfavorable facts
about
him to anyone other than the person himself. If you're interviewing a
witness
about the possible misconduct of another person, just find out what the
witness knows, don't repeat what you may have learned from another
source.

You should go into any interview of a witness with an outline of the
questions that you intend to ask. However, the outline should not be
taken
as exhaustive. You will have to follow up on the answers and pursue any
relevant further lines of inquiry that become apparent.

If you ask about documents, show them to the witness, then mark the
copies that you used so that we will have a record of what you showed
her.
In addition, after you review these questions, let me know if you have
any questions, additions, or suggestions related to them. Try to let
your
lawyer know ahead of time when you will be conducting each interview so
that he can try to be available by telephone in case any questions or
problems
come up while it is going on.

Usually, it is best to interview the complainant first. Then, you
should
prepare an outline of questions for the second witness. Try to be alert
to any indications of other possible witnesses who can be interviewed.

d. Closing the Investigation

When your investigation is done, tell the complainant your
conclusions
and the action, if any, that you took as a result, but do not convey
the
substance of the statements of any of the other witnesses. If you are
not
sure whether you might be facing potential trouble, call your lawyer.

2. How
to Nail Down the "At Will" Relationship

In California, all employment is presumed to be "at will," unless
there
is an agreement to the contrary. Labor Code Section 2922. This means
that,
in theory, an employer does not need to show that he or she has a good
reason to discharge an employee. Mallard v
Boring,
182 Cal.App. 2d 390 (1960). However, even where employment is
at
will, certain bad reasons, like age discrimination, will subject you to
liability.

The at will presumption may be rebutted by evidence of any
agreement,
whether express or implied, and whether written or oral. Pugh
v. See's Candies, Inc., 116 Cal.App.3d 311 (1981). You need
to preserve and document the at will relationship so that your reasons
for discharging an employee will not be second-guessed by a judge or a
jury. You do this by, first, watching what you say and what you write.
For example, praising an employee where it is deserved is good
management;
vague promises of reciprocal loyalty or future rewards are asking for
trouble.

You should also carefully review your policy manual and personnel
memoranda.
Any vague promises or assurances should be eliminated. If the policy
manual
contains any specific causes for discipline or discharge, there should
be a disclaimer in the same section clearly reaffirming that,
notwithstanding
the causes listed, continued employment is at will and can be
terminated
with or without cause by either the employer or the employee.

You should also get periodic written acknowledgments of the at will
relationship. These acknowledgments should be contained in the job
application,
the policy manual, the periodic written reviews, and in an
acknowledgment
that each employee should sign at least annually.

This annual signed acknowledgment is one of your most powerful
tools.
It should be reviewed by your lawyer and should contain a clear
acknowledgment
and agreement that the employment will continue only so long as both
employer and employee wish, that termination may be for any reason or
for
no reason, and that no contrary promises or statements have been made.

3. Establishing
Termination for Good Cause

Once you have done everything possible to establish and maintain an
"at will" employment relationship, it does not mean that you can
neglect
to have and document good cause for any discharge or other adverse
action.
You must always have and document good cause and warnings, even
though they may not theoretically be necessary.

There are several good reasons for this. The first is that, if you
don't
have a good reason for what you do, people will be ready to
believe
that you had a bad reason. Even in an "at will" employment, you
cannot fire someone for a reason that is "contrary to public policy" or
that is specifically forbidden by a multitude of laws and rules.

Second, no matter who hard you have tried to establish and maintain
at will employment, there is no guarantee that you will prevail on this
issue at trial. Therefore, it is essential to establish a backup
defense
of good cause.

When it comes to establishing the factual basis of good cause, such
as, say, the fact that the employee was harassing a coworker, you do
not
have to prove that you were right. Of course, you should always try
to make sure that you are right. However, there are cases that hold
that
a reasonable belief may be good enough. Hicks
v. Pacific Bell (Second Dist. 2/5/97). If you have
conducted
a fair and thorough investigation using the methods described elsewhere
in this manual, you should be able to establish your good faith belief
in the truth of your facts.

Some specific causes for discharge that have been upheld by the
courts
are failure to perform, reduction in force, misbehavior, and failure to
follow proper instructions. This list is not exclusive.

These are considered good cause for employment at will or for an
indefinite
term. The list of causes for terminating an employment contract for a
definite
term before its expiration is shorter, and is given in Section 2924 of
the Labor Code.

In order to strengthen your hand in establishing the validity of
your
usual reasons for termination, you should include a nonexclusive list
of
causes for termination in your policy manual.

In addition to documenting your good cause, you should take equal
care
to document a lack of bad causes. An employee often claims bad
motive
on the part of one or more of the managers who were involved in his
termination.
Therefore, it is a good idea to anticipate this possibility by
involving
more than one manager in every discharge.

Where there is a specific anticipated complaint, involve someone who
is immune from that complaint in the process. For example,
where
you anticipate complaint based on gender or race, involve a manager of
the employee's gender or race. Where you anticipate a complaint based
upon
personal conflict, make sure that all of the evidence is considered by
and the ultimate decision is made by a person or persons who have not
been
involved in the alleged personal conflicts.

4. Avoiding
the Defamation Theory

Defamation includes libel and slander. Oral defamation is called
slander.
Written defamation is called libel. A claim for defamation often
accompanies
claims for wrongful discharge or be an independent suit.

The elements of a claim for defamation are a false, unprivileged,
statement
to a third party that causes damage to reputation. You
make
this case untriable by avoiding and documenting the avoidance of each
of
the five elements of the claim.

a. Statement

In order to have a defamation you have to make a statement, whether
orally or in writing. Therefore, it is a good idea not to say anything
about an employee that you don't need to say.

The prime example of where making unnecessary statements is in
connection
with job references. The safest policy about job references is, as a
matter
of uniform policy, to confirm the positions held and the dates of
employment,
and to say or confirm nothing else.

Saying anything else is risky, whether
regardless
of whether the reference is a good one or a bad one. If you give a bad
reference you risk a claim for defamation or interference with
prospective
economic advantage. Jensen v. Hewlett-Packard Co., 14
Cal.App.4th
958, 965, 18 Cal.Rptr.2d 83 (1993) (libel action may be based on false
accusations in employee evaluation form of criminal conduct,
dishonesty,
incompetence, or reprehensible personal characteristics or behavior); Marshall
v. Brown, 141 Cal.App.3d 408, 412, 190 Cal.Rptr. 392 (1983)
(wrongful
interference liability based on negative comments in former employer's
evaluation letter). If you give a good reference, and the employee does
something awful when working for the new employer, you could be held
responsible
for giving a false or negligent reference. Randi W. v. Muroc Joint
Unified
School Dist., 14 Cal.4th 1066 (1997) (former employer held liable
for
negligent recommendation where teacher sexually molests student at new
job).

b. False

In order to be guilty of defamation, your statement must be false.
To
use the common expression, in defamation cases "truth is a defense."
Therefore,
when you must say something bad about an employee, or anyone
else
for that matter, make sure that you can prove that it is true.

c. Unprivileged

Defamation is defined as an "unprivileged" statement. Two of the
most
important of these privileges are contained in Section 47 of the Civil
Code.

The first of these is the privilege for statements made in a
judicial
proceeding. Civil Code Section 47(b). This privilege is absolute, and
applies
to defamation actions, as well as other kinds of claims. The practical
consequence of the litigation privilege is the following rule: if
you've
got to say something bad about someone, say it in litigation.

The second most significant privilege in Section 47 is the privilege
for statements made in good faith by one person who has a legitimate
interest
in the subject of the communication to another person who also has such
a legitimate interest. This privilege should protect statements like
job
references and internal deliberations about personnel actions. Cuenca
v. Safeway San Francisco Employees Fed. Credit Union, 180
Cal.App.3d
985 (1986).

However, the problem is that this privilege, unlike the litigation
privilege,
is not absolute. The plaintiff can defeat it by showing bad faith. Robomatic,
Inc., v. Vetco Offshore, 225 Cal.App.3d 270 (1990). Usually,
the plaintiff does this by alleging that the statement was made with
the
intent to harm him.

Notwithstanding the fact that the legitimate interest privilege
requires
good faith, it is worth having. The practical consequence of this
privilege
is that, if you must say something bad about someone, and you cannot
say
it in litigation, say it only to someone with a legitimate interest in
the information.

d. Third Party

Defamation requires a that a statement be made to a third party.
Therefore,
if you have something critical to say about an employee, say it to the
employee, not his co-workers, your customers, or other persons. This is
especially important to remember when you are doing an internal
investigation.
When you are interviewing a witness, don't tell him the bad things that
other witnesses have said about anyone.

e. Damages

A defamation claim requires that the plaintiff prove that he was
harmed
by the statement. Certain kinds of statements are especially risky and
considered damaging as a matter of law without proof. Examples of these
are allegations of dishonesty and incompetence. Therefore, if you can
reasonably
formulate your reasons for a discharge without using alleging
dishonesty
and incompetence, you should do so. For example, instead of saying that
the employee stole the company's money, you can usually say that he was
unable satisfactorily to account for it. Instead of saying that the
employee
is a liar, you can usually say that some specific statement appeared to
be inaccurate.

CLAIMS FOR HARASSMENT AND
DISCRIMINATION

1. A
Practical Approach to Avoiding Litigation

You, as an owner or manager of a business, will never be able to
learn
all of the laws and rules relating to workplace discrimination and
harassment.
They are numerous, byzantine, sometimes contradictory, unpredictable,
and
constantly changing. What you can and should do is take practical steps
that have a good chance of keeping you out of trouble.

Among the many protected classes these days are race, color,
religion,
sex, gender, pregnancy, childbirth, marital status, age, national
origin,
physical or mental disability, medical condition, ancestry, and, in
some
places, sexual orientation.

Luckily, preventing harassment and discrimination and avoiding
liability
for what you can't prevent require roughly the methods. Here's how to
protect
your business without becoming obsessed about it.

First, have an anti-discrimination and anti-harassment policy and
put
it in your written policy manual. The manual should set clear
procedures
for reporting problems, with plenty of alternative options, so that
there
will be ways to get around alleged perpetrators in the chain of
command.

Require all employees to report all cases of harassment or
discrimination
of which they are not themselves the victim. Encourage victims to do
the
same.

Document every complaint that you get. Investigate every complaint
thoroughly
and involve legal counsel where appropriate. Involving your lawyer at
an
early stage where there is an indication of a serious problem can be
important
if there is a later lawsuit.

If your internal investigation is properly conducted by a lawyer or
under his supervision, it may be possible to shield damaging documents
that are created as part of your investigation from disclosure in any
later
lawsuit. This protection is called the "work product" doctrine and,
while
the protection is not absolute, it is well worth preserving. When your
investigation is done, tell the complainant your conclusions and the
action,
if any, that you took as a result, but do not convey the substance of
the
statements of any of the other witnesses.

If you are regularly using the all-important employee's annual
acknowledgment
(and you should!), it should cover the area of harassment and
discrimination.
This section of the acknowledgment should list all the forbidden kinds
of conduct. It should then contain a statement by the employee that,
since
first being employed by the company, he has neither been the victim of,
nor witnessed, any incident of such conduct, other than any incident
that
he may already have reported in writing to specified company officials.

Whenever you must take action adverse to a member of a protected
class
(or any other employee, for that matter), always document your reasons.
Where possible, involve other members of the protected class in the
disciplinary
process. If it becomes necessary to discharge a member of a protected
class,
it can be harder for the discharged employee to make a case against you
if you replace him with another member of the same protected class.

There are also many positive things that managers can do to promote
a workplace that is free of discrimination and harassment. One of the
most
effective is for you, as a manager, to model the behavior you seek to
establish.

Managers should always treat every employee politely and with
respect.
They should always strive to see employees as people, not as
representatives
of a class. Managers should always avoid crude jokes, and comments or
nicknames
that may be seen as pejorative. In fact, managers should always avoid
any
references at all to age, gender, ethnicity, or membership in any
protected
class, unless they are clearly necessary and appropriate.

You should never indulge in or tolerate pejorative talk or conduct
on
the grounds that it is "all in fun," that the butt of the comments was
responding in kind, that they "build camaraderie," or the like. Believe
it or not, many people will try to defend their abuse by saying things
like "he knows I only say things like that to people I really like."
Such
excuses sound really lame in court.

These things may seem obvious, but you would be surprised at what
some
otherwise intelligent managers will say to a group of employees at,
say,
the company Christmas party.

Often, a person who has made a thoughtless comment will respond to a
tactful conversation with a supervisor. For example, an employee who
habitually
refers to another employee as the "old man" might simply be asked
whether
he has thought about how his conduct might hurt the other employee's
feelings,
and reminded that, in any event, it is inconsistent with the company's
policy of showing respect for coworkers.

A manager or other employee should not be allowed to laugh off
unacceptable
behavior. If the conduct is sufficiently egregious, or does not respond
to correction, you should clearly explain to the offender that, if he
will
not change his conduct, you will be forced to discharge him. Failure to
do so could put your entire business needlessly at risk.

The bottom line is that you should not be tempted to become cynical
or careless about matters of harassment or discrimination. Yes, the
laws
sometimes seem contradictory. Yes, there is no way to be sure of being
completely safe. However, if you follow the rules above, your chances
of
falling victim to a lawsuit over these issues can be greatly
diminished,
and you will have created a healthier, more productive working
environment.

2. Persons
with Disabilities

The Americans with Disabilities Act opened up a broad new field for
discrimination claims. ADA is so broad and so vague that no one knows
its
exact limits, including the courts. If you think you may have an ADA
situation,
you should talk to your lawyer to see what the law is on that
particular
day in your judicial district.

There are, however, some simple rules that will help you stay in the
clear. First, make and document reasonable accommodations of persons
who
arguably have a handicap. Second, if you need to take adverse action
against
a person with an arguable handicap, document either 1) his inability to
do his job, even after reasonable accommodation, or 2) a reason for
action
unrelated to handicap.

CLAIMS FOR UNPAID
OVERTIME,
LEAVE, AND OTHER COMPENSATION

One of the most galling surprises in business occurs when a
marginal
employee leaves after many years of mediocre performance and then, of
the
blue, the employer gets slapped with a huge claim for unpaid overtime
and
leave. Such parting shots are common and can result in payments of tens
of thousands of dollars.

If you become the victim of such a claim, perhaps the worst part of
it is the knowledge that the whole problem might have been avoided if
you
had followed a simple procedures.

1. Who
Can and Cannot be Treated as an Exempt Employee

Businesses in California are required to pay time and a half to all
nonexempt employees who work either more than 40 hours in one week or
more
than 8 hours in one day. This makes flexible responses to changing
workloads
and flextime arrangements, such as four day weeks, expensive for the
employer.
Tracking hours worked and properly adjusting paychecks is also an
administrative
burden.

As a result, many employers fall victim to wishful thinking by
improperly
attempting to categorize some or all of their employees as exempt from
the overtime rules.

The overtime laws exempt executive, administrative, or professional
employees, outside salespeople, and certain members of the employer's
family.
The terms "executive" and "professional" have been subjected to such
abuse
these days that it would appear that they could refer to almost
anybody.
After all, inside salespeople are routinely called "account
executives."
We are sold "executive" pencil sets, "executive" briefcases, and
"executive"
clothing.

And isn't everyone who does something for money a "professional" of
one kind or another? The people who clear your sewage lines, keep your
books, exterminate your cockroaches, fix your car, clean your teeth,
and
trim your trees all consider themselves "professionals."

However, the courts and the government agencies that enforce the
overtime
rules do no take such a loose view. If anything, many employees, such
as
certified paralegals working in a law office, who would probably be
called
"professionals" in common parlance are not exempt. Likewise, the
government
often takes issue with a business's attempts to categorize a
salesperson
as "outside."

2. Claims
for Unpaid Overtime

Above, we discussed the proper categorization of persons as exempt
versus
nonexempt and employees versus independent contractors. Once you
realize
that you are dealing with nonexempt employees, you must make sure that
you properly track and pay for their time.

Just because you don't ask your employees to work overtime it
doesn't
mean that you can dispense with monitoring their working hours.
Employees
are not permitted to volunteer, and managers must not permit them to
work
early, late, through lunch, or on weekends without compensation. Most
overtime
claims are based on such "unrequested" overtime.

Finally, you must document overtime or, just as importantly, the
lack
of overtime. Timesheets are a good tool for this. They should be signed
by the employee and kept in a file for at least four years.

The acknowledgment on the timesheet above the employees signature
should
include a disclaimer of any hours other than the ones shown, not just a
statement that the hours shown are accurate. It should also say that
the
employee has not worked any overtime, other than what may be shown on
the
sheet, for which he has not already been paid at applicable overtime
rates.
Even for employees who are not supposed to be working overtime, and
have
regular hours, a time sheet can be helpful in documenting proper
payment.

You should also put provisions in your policy manual clearly saying
that no employee is permitted to work overtime, work outside of the
office,
or work outside of regular hours without advance written approval from
specific persons. The policy manual should also say that no employee is
permitted to work overtime without being paid for it a the proper rate.

If you follow these steps consistently, you will greatly reduce your
chances of getting a post-departure surprise from an employee who
claims
to have spent more hours toiling without compensation than you ever
dreamed,
thereby piling up a tidy little severance package for himself.

3. Claims
for Unpaid Vacation Time

Most businesses give their full time employees paid vacation time,
which
usually accrues at a rate of so much vacation leave per week, month, or
other period worked. Failing to handle such vacation time properly can
result in the buildup, over a period of years, of substantial
liabilities,
and in large claims by departing employees for unpaid vacation time.

The main problems with vacation leave are unenforceable policies
that
result in invalid forfeitures, failure to track and document usage, and
failure consider how vacation policies may apply to top management.

Because most businesses have learned that vacation time, if untaken,
can slowly build to staggering proportions, most of them make some
attempt
to limit the amount of that obligation in some way, often by limiting
the
amount of vacation leave that can accrue or be carried forward from
year
to year. However, in doing so, many such businesses inadvertently
creating
unenforceable forfeiture provisions that will not prevent the buildup
enormous
obligations.

The important thing to remember is that vacation time, once accrued,
cannot be forfeited and cannot be waived. Once accrued, it must be used
or paid. Therefore, "use it or lose it" provisions will not be
enforced.
On the other hand, caps on accruals will.

What's the difference between an invalid forfeiture and a valid
limitation
on accruals? Consider a leave policy that says that "any accrued
vacation
time in excess of two weeks will be lost if it is not used by the end
of
each calendar year." It will be unenforceable because, as written, it
calls
for the loss of a portion of the vacation time that has already
accrued.
Likewise, a leave policy that says "no more than two weeks of vacation
leave may be carried from one calendar year to the next" will also be
invalid,
because what is not carried forward is lost.

On the other hand, a leave policy that says that "once an employee
has
accrued a total of two weeks of vacation time no additional time will
be
earned" can be valid, because it stops leave from accruing, rather than
causing it to be lost after it is earned. Sophistry? Maybe. Is it the
law?
Yes.

The second common problem with leave is the failure to track and
document
its usage. This happens for several reasons. First, while tracking
accruals
is easy, tracking usage is not. Since leave usually accrues at a
regular
rate, all you have to do to calculate accruals is to multiply the time
on the job by the accrual rate.

On the other hand, usage is usually irregular. The disparity in the
relative ease of tracking accruals and usage is exacerbated by the fact
that, in any dispute, the burden of proving that accrued overtime has
been
taken is on the employer.

Moreover, once a dispute arises, I sometimes find that a business
has
unintentionally generated inaccurate computer-generated records, such
as
computer-generated pay stubs. Each pay period, the computer, like the
enchanted
broom in the "Sorcerer's Apprentice," mindlessly keeps adding leave
time
at the programmed rate to the running total on the pay stub, and if the
usage has not been carefully entered into the computer by hand each
time
it occurred the resulting erroneous documents can be dangerous weapons
in the hands of a hostile lawyer.

In order to protect yourself from recordkeeping problems, it is a
good
idea to include the issue of accumulated leave in your annual employee
acknowledgment. The leave and overtime section of the acknowledgment
should
say how much unpaid leave the employee has accumulated and the language
should make it clear that the employee is vouching for the accuracy of
the figure.

Finally, in tracking leave time, many businesses overlook their top
management and professional employees. These businesses mistakenly
assume
that such persons, who may be exempt from wage and overtime laws, and
who
may set their own hours and take time off at their own discretion, will
not make any claims for accrued leave.

The fact is that, unless applicable written leave policies or
employment
agreements explicitly exclude such persons, the presumption is that
they
accrue leave like everyone else. It may seem silly to track the leave
of
a company's founder and CEO, but failing to do so has more than once
resulted
in a claim for years of accumulated leave at a fancy rate.

To summarize, you can avoid most claims for unpaid leave by taking
the
following simple steps: Make sure your policy manual clearly
articulates
a valid cap on accruals and not an invalid forfeiture. Record all usage
of vacation time. Don't forget the managers and professionals. Get
periodic
acknowledgments of amount of leave taken and balance left. And be sure
to check those pesky pay stubs!

AVOIDING LIABILITY
FOR INDEPENDENT CONTRACTORS

The taxing authorities aren't the only potential adversaries
interested
in treating people as employees rather than independent contractors. A
business's customers and others may also be affected.

If someone is an employee rather than independent contractors, it is
more likely that a business will be liable to others for their mistakes
or misconduct. In general, it is unlikely that a business will be
liable
on a no-fault theory for the acts of an independent contractor, even
though
it would be liable on such a theory for an employee.

1. Two
Different Kinds of Liability--direct and Vicarious

Direct liability is liability for one's own acts or omissions. In
the
context of a corporation, these require involvement by persons whose
acts
are considered to be the acts of the corporation itself, for example,
officers
and branch managers. Usually, direct liability requires a showing of
fault,
though there are some no-fault forms of direct liability.

Vicarious liability is liability for the acts or omissions of
others.
Businesses are often held vicariously liable without requiring the
plaintiff
to show any fault or wrongdoing on their part.

2. Theories
of Direct Liability

There are two common theories of direct liability. First, a
corporation,
partnership, or limited liability company is responsible when its
officers
or managers directly participate in the wrongful act or omission.

Second, entities are sometimes directly responsible for their
negligent
supervision of a person for under their control.

3. Theories
of Vicarious Liability

The most common theories of vicarious liability are aiding and
abetting,
ratification, and respondeat superior. Because it is so broad and
does not require any fault on the part of upper management, by far the
most dangerous of these theories of vicarious liability is respondeat
superior.

4. Aiding
and Abetting
In general, a person, including a corporate person, who aids wrongdoing
with the knowledge of the facts is responsible for it. Since this is a
fault theory, whether the primary wrongdoer is an independent
contractor
or an employee, will not make any difference.

5. Ratification

When a person or organization knowingly accepts the benefits of
wrongdoing
it is said to ratify the wrongdoing and becomes liable. Since this is a
fault theory, whether the primary wrongdoer is an independent
contractor
or an employee, will not make any difference.

6. Respondeat
Superior

Under the doctrine of respondeat superior, an employer is
responsible
for the wrongdoing of its employee within the scope of the employment.
This is a no-fault theory, and depends upon the existence of an
employee-employer
relationship. It is not available where the wrongdoer is an independent
contractor.

Whether an investor can recover from a broker-dealer on most of
these
theories will not be affected by whether the registered representative
is an independent contractor or and employee. However, the broadest and
most generally applicable theory--respondeat superior--does depend on
whether
the registered representative is or is not an employee.

7. Limitations
on Direct Theories of Liability

Direct theories of liability have certain important limitations on
them
that make them less dangerous than respondeat superior. Direct
participation
requires that responsible persons of the entity actually participate in
the wrongful acts or omissions. This is not common in the usual case of
misconduct by a lower level employee. Usually, the supervisors of the
employee
are unaware of the problem until after it occurs.

Negligent supervision is more common than direct participation, but
the plaintiff still has to prove negligence and a duty of care.
Negligence
is not a no fault theory, and, to win on this theory, a plaintiff must
show that reasonably prudent supervision would have avoided the harm.

In order to establish a duty of care a plaintiff has to prove that
there
was a duty to him to supervise the activity involved. Your company may
not have a duty to supervise activities of an independent contractor
for
activities that are not performed in connection with the business of
your
company.

8. Limitations
on Vicarious Theories of Liability

Most theories of vicarious liability other than respondeat superior
also have important limitations that make them less dangerous than
respondeat
superior.

Aiding and abetting requires knowing help in the wrongdoing. This is
unusual in the usual corporate context. Ratification usually involves
knowing
acceptance of the benefits of wrongdoing. This also is comparatively
unusual.

9. Respondeat
Superior Has Few Limitations

Respondeat superior is no fault liability that covers all activity
within
the scope of employment. The scope of employment is often interpreted
very
broadly. Therefore, respondeat superior liability can be breathtakingly
broad.

Employer does not have to be at fault and can, in fact, be
completely
innocent.

It does not matter if the acts were in excess of the
employee's
authority,
contrary to the instructions of the employer, or even criminal.

It does not matter that the employer does not get any
benefit from the
acts of the employee.

It does not matter that the employer could not possibly
have prevented
the employee from doing the wrongful acts.

Does not matter whether the employee did or did not use an
instrumentality
of the employer.

Does not matter that employer made heroic efforts to
prevent the harm.
Ingle case.

In general, the only requirement for an act to be considered inside the
scope of employment is that the harm was a reasonably foreseeable risk
of the kind of business in which the employee is engaged. This can
bring
in virtually any activity that is similar to the what employee does for
your company regardless of whether it is actually performed on your
behalf.

When you properly use independent contractors rather than employees,
respondeat superior liability is eliminated. This can substantially
reduce
the risk of legal liability for the acts of the persons involved.

10. Other
Issues Affected by Whether Contractor or Employee

Employers have an obligation to indemnify employees for the results
of own misconduct under Section 2802 of the Labor Code. You don't have
to buy worker's compensation insurance for contractors. When you
properly
use independent contractors, you don't have to worry about overtime and
other provisions regulating the hours and conditions of work.

HOW TO
REDUCE
THE HIGH COST OF UNAVOIDABLE LITIGATION

1. The Use of
Customized
Arbitration Clauses

A contractual arbitration clause is one of the most powerful ways
that
a business has to try to control its exposure to costly and dangerous
lawsuits.
Arbitration, mediation, and other methods of resolving conflicts
outside
of court are sometimes collectively referred to as alternative dispute
resolution, or "ADR."

By the careful use of an arbitration or other ADR clause in its
contracts,
a business can dramatically affect how disputes with its employees,
customers,
vendors, and others with whom it does business are resolved, discourage
claims from being brought, and limit its exposure to large damage
awards.
On the other hand, an arbitration clause that is carelessly drafted or
slanted in favor of the other party to an agreement can be a serious
disadvantage
in the event of a dispute.

When parties agree to arbitration, they make a binding determination
that some or all of their disputes will be resolved outside of court by
one or more persons called arbitrators, rather than in court by a judge
or jury. In recent years, courts have allowed the contracting parties
broad
discretion to make up any rules they wish concerning who will hear the
dispute and what rules will govern the outcome.

Arbitration clauses can specify simplified procedures both before
and
trial. For example, they can limit or eliminate the depositions,
interrogatories,
document requests, and pretrial motions that are responsible for much
of
the sometimes crushing expense of litigation. The procedures at the
arbitration
hearing, which takes the place of a trial in court, can be simpler and
less time consuming than those for a jury trial. Arbitration clauses
can
also set short mandatory schedules for resolution of a problem before
both
the problem and the business involved in it become ancient history.

In addition to reducing litigation expenses and speeding the
resolution
of disputes, arbitration clauses can discourage or prevent claims from
being made in the first place. For example, a contract can provide that
claims that are not brought by certain deadlines are barred altogether.
Such provisions, which create shortened statutes of limitations for the
parties, will be enforced by the courts if they are found to be
reasonable.
Other provisions can require that, before making a demand for
arbitration,
the claimant must first try in good faith to negotiate a resolution
either
with or without the help of a trained mediator.

Provisions that require the party demanding the arbitration to
advance
the arbitrator's fees, which can be substantial, can deter groundless
claims.
So can provisions requiring the loser to pay the winner's attorneys'
fees.

Arbitration clauses, and other contract clauses, can limit the type
of damages or other relief that may be sought by a claimant. For
example,
the courts often uphold agreements that prevent the parties from
seeking
punitive damages, specific performance, or injunctive relief. A
contract
can also attempt to limit any award to actual economic out of pocket
damages,
thereby reducing or preventing exposure to claims for lost profits,
pain
and suffering, mental distress, and consequential or special damages.
These
kinds of limitations on damages not only reduce the amount of potential
awards, they discourage potential claimants, and their lawyers, from
making
claims in the first place.

There are a wide variety of organizations and individuals that, for
a fee, administer arbitrations. Some of them, like the American
Arbitration
Association, have procedural rules for dealing with issues that may not
be covered in the contract. Arbitration provisions can incorporate
these
rules into a contract, and vary any of them that the parties wish. If
no
rules are specified in the contract, California law supplies rules that
will apply by default.

Because of the power and flexibility of arbitration clauses, failing
to include one in a contract or choosing one poorly can actually
determine
whether a business will survive a major dispute. As a result, no
business
should ever sign a contract or enter into a significant transaction or
relationship without first considering what kind of arbitration clause
or agreement could reduce its exposure in the event of a later lawsuit.

2. The
Three Most Common Litigation Traps and How to Avoid Them

If you are trying to control the cost of litigation, it is helpful
to
distinguish between strategies for reduction of costs and boondoggles.
Strategies
involve choices requiring thought and the weighing of risks against
savings.
Therefore, after considering them, you may decide that the a particular
economy is not worth the increased risk. Boondoggles are work
that
usually has insignificant value compared to the expense. You always
want to avoid them.

The three most common litigation boondoggles are wasteful staffing
practices,
the digesting of deposition transcripts, and the failure to attempt to
settle.

a. Wasteful Staffing

Wasteful staffing practices consist of excessive staffing, changes
in
staffing, and excessive delegation to junior lawyers. If you have more
than one lawyer and one paralegal regularly working on your case, and
the
litigation is unlikely to result in a judgment of more than a half a
million
dollars, you should ask your lawyer about staffing.

b. Digesting Transcripts of Depositions

The routine digesting transcripts of depositions is one of those
fine
old traditions that law firms have been practicing for ages and that,
as
far as I can tell, produce only useless paper and increased billings
for
paralegals and junior lawyers. I have never, I repeat, never,
found
a deposition digest to be at all helpful in a case. Now that you can
get
your depositions on a computer disk and search do instant text searches
on them, I believe that any law firm that is charging you for
deposition
transcripts is, at best, clueless.

c. Failure to Attempt Settlement

The most effective way to control litigation costs is to settle
early.
Sometimes this is not possible. However, it should be attempted in
every
case.

Your lawyer may be reluctant to get the ball rolling on settlement
because
he thinks it make him look like a wimp, so unless you have an unusually
secure lawyer, it may be up to you to raise the subject. This does not
mean that you should appear weak to your opponents. The idea is to talk
softly, but keep whacking the bad guys with a big stick until they come
to the table.

3. How
to Help Your Lawyer Reduce His Fees

a. Have a strategy

You can't control your fees if you don't have a strategy. Flailing
around
at a couple of hundred dollars per hours gets expensive fast.

b. Talk to Your Lawyer

Ask your lawyer about his overall strategy for the case. What kinds
of motions does he think may be cost effective? What does he think
about
the prospects of an early settlement? How are you going to try to win
the
case? Is a demurrer worth the money? Is it realistic to try to win on
summary
judgment?

Make sure you talk to your lawyer early about settlement. You should
do this even where early settlement is not likely. Many lawyers don't
like
to bring this up.

Discuss each motion or other significant decision with the lawyer in
terms of cost-benefit. Get estimates for specific activities that are
under
consideration. No lawyer can reliably estimate the cost of an entire
lawsuit,
but he should be able to do a reasonable estimate for a particular
motion.
Ask what benefit can reasonably be expected from the motion or other
tactic
being considered. Ask what alternatives exist for that tactic and what
they would cost.

c. Determine What the Case is Worth

Estimate both trial value and settlement value. Settlement value is
much higher than trial value because of the staggering costs of
litigation.
At best, such an evaluation is a guess, but must be done in order to
make
rational decisions about strategy.

If you are a plaintiff, ask yourself

how much can you realistically expect to recover if you win?

what are your chances of winning?

how likely is it that you will be able to collect any
judgment?

how much is the case likely to cost?

For example, if the most likely recovery if you win is $200,000, your
chances
of winning are 50%, your chances of collecting judgment are 100% (often
it is far less than that), and the cost of the litigation (including
any
appeal and collection procedures!) is $100,000, the trial value of the
case is NOTHING! On the other hand, the settlement value of the same
case
would be $100,000.

If you are a defendant, you should make same kind of calculation.
The
results will be equally sobering, I assure you.

d. Consider Strategies for Cost Reduction That May Involve Some
Risk

The following options each involve some risk, and are not
appropriate
in every case. But you should consider them with your lawyer in each
case.

Written Statements

Consider the use of written statements instead of depositions for
healthy
and friendly witnesses who you are sure will be available to testify at
trial.

Answer Instead of Demurring

Consider filing an answer rather than a demurrer even to a legally
insufficient
complaint.

Preliminary Relief

Don't seek preliminary relief, like a preliminary injunction, unless
you
need it, you have a good chance to get it, and it will be worth the
money.

Motions to Compel Discovery

When considering whether to make motions to compel discovery, don't
just
ask whether you are entitled to the information--ask whether it is
worth
the cost of obtaining it.

Simplify Your Complaint

Consider whether you can sometimes make a lawsuit that you file less
expensive
by simplifying it.

(1) Forego Certain Parties
You should consider not suing parties against whom you only have a
slim chance of prevailing and peripheral parties who have no money.

(2) Dispense With Exotic Claims
Anyone who has gone to law school can spin a virtually unlimited number
of exotic theories involving an unlimited number of defendants.
Consider
dispensing with theories that don't add anything significant to the
case.

(3) Avoid Factually Complicated Claims
Sometimes you have a strong claim that can probably be decided in
summary
judgment and a weak claim that will require a long and expensive trial.
When this happens, consider not bringing the factually complicated
claim.

e. Your Invoice Is Your Friend
Your invoice is one of your best tools for reducing your costs. You
should always read it, and ask questions if you have them. If the
invoice
is not detailed enough for you to understand what you're paying for,
ask
for more detail.

f. Don't Let, or Make, Your Lawyer Do the Grunt Work

You can save a lot of money if you will do as much of the necessary
but routine tasks involved in litigation yourself. For example, it will
cost you a lot less to pay your own clerical personnel to locate and
organize
your own documents than to pay your lawyer to drag them out of you and
then sort through them.

Other things you can do to help keep the costs down are to prepare a
written chronology summarizing the relevant facts and evidence in the
case,
help with the investigation by locating witnesses and obtaining
necessary
documents in the hands of cooperative third parties, crunch your own
numbers,
prepare any necessary financial schedules and exhibits.

4.
Avoid the Attitude Traps

Certain statements that are often heard in law offices are often the
prelude to an sad lesson in the high cost of litigation. If you are
tempted
to say any of the following to your lawyer, watch out!

"Can you just take a quick look at this?" Ask yourself, is it
possible
to sort out the relevant facts in the time that you are allowing?

"I want a "junk-yard dog" litigator." Remember that over 90% of all
disputes are settled before a court battle. If you hire a mad dog, you
will probably get bitten. You don't want mindless aggression. You want
rational aggression.

"Its the principal of the thing." Usually, after the first $15,000
or
so, the principal seems to get less important.

"Money is no object." This is almost never true. The only question
is,
how much is it worth.

"I'd rather pay you than him." This usually indicates that you have
an irrational certainty in your chances of winning.

APPENDIX 1
Annual Employee Acknowledgment

RECEIPT OF OFFICE MANUAL AND ACKNOWLEDGMENTS

IMPORTANT: You need not and should not sign this form unless
the statements in it are completely true and accurate. If any
correction
or change is needed to this form before it is completely accurate,
please
discuss them with the Office Manager or the President so that those
changes
can be made before you sign it.

1. I, , acknowledge I have received the Office Manual for [Company]
("the Company") adopted as of _______________. I understand that it is
my responsibility to familiarize myself with the information,
procedures,
and policies described in that manual. I agree to abide by the
principles
and practices explained in the manual, and to contact my Supervisor or
the Administrator if I should have any questions or need clarification
as to its content or interpretation. I understand that the policies and
procedures contained in the manual are subject to change, and I will be
notified of such changes. However, this manual is neither intended to
be,
nor does it constitute, a contract of employment.

2. I warrant and represent that no written or oral promises,
assurances,
or representations whatever, whether express or implied, have been made
to me in order to induce me to accept employment from the Company. I
understand
that no one at the Company was or is authorized to make any such
promises,
assurances, or representations and that any such unauthorized promise,
assurance, or representation could not and cannot be relied upon.

3. I understand and agree that my employment is "at will," which
means
that either the Company or I may terminate my employment at any time
either
of us desires with or without any reason and I warrant and represent
that
no written or oral promises, assurances, or representations, whether
express
or implied, to the contrary have been made to me at any time whether
before
or during my employment.

4. I warrant and represent that, since I was first employed by the
Company,
I have not worked any overtime that has not been reported in writing to
the Administrator or the President. I represent that, as of this date,
I have not worked any overtime, holidays, or other time in addition to
normal office hours for which I have not already been properly
compensated
at either one and a half or two times my normal hourly pay.

5. As of the end of last pay period completed as of the end of
________________,
I have accumulated a total of ____ hours of leave time that I have
earned
but have not yet used.

6. I warrant and represent that, since I was first employed by the
Company,
I have not been the victim of, or witnessed any evidence or indication
of, any form of harassment or discrimination at or by the Company based
upon race, color, religious creed, sex (including gender harassment,
and
harassment due to pregnancy, childbirth, or related medical
conditions),
marital status, sexual orientation, age, national origin, physical or
mental
disability, medical condition, or ancestry, other than any incident
that
I may have already reported in writing to the Office Manager or the
President.
As to any such incident that I may already have reported to the Office
Manager or the President and of which I may have been the victim, I
have
been informed of the outcome of the Company's investigation into the
matter.

Dated:

Employee's Signature

Copyright 1997 Vincent DiCarlo

APPENDIX 2
Termination Letter

[COMPANY LETTERHEAD]

[Date]

---

Social Security # ---

Hand Delivery

Re: Offer of Severance Agreement

Dear ---:

We regret to inform you that your employment with this company is
being
terminated effective [date] for reasons that we have discussed with
you.

As you know, your employment with this company was at will and the
company
has no formal severance package. Accordingly, we are not obligated to
provide
any severance benefit and are only obligated to pay compensation that
has
already accrued.

However, we are willing to offer you the written severance agreement
that we are giving you with this letter for your review and
consideration.
The agreement provides, among other things, for a continuation of your
full salary payments for [period], for [period] of continued medical
benefits,
and for [any other benefit]. If you wish to accept this offer, you must
sign and return the agreement to us on or before [date].

Of course, we will pay you any leave or other compensation that you
have accrued as of your termination date regardless of whether or not
you
accept our severance offer.

Very truly yours,

[Personnel Officer Conducting

Exit Interview]

1. DISCLAIMER:
This document is part of an educational presentation. It is not
intended
as legal advice and should not be relied upon. It is based upon
California
law as of the date of its preparation, which may be significantly
before
the last date on which this page was last updated, is subject to
change,
and may not be the same as other law. There is no warranty that
any
information in this material is correct or accurate. You are advised to
consult counsel before adopting any of the ideas or suggestions in this
material, or using any of the forms in it, which may or may not be
applicable
to your specific situation.

DISCLAIMER: I have entered
government service and, as of September 1, 2008, am no longer engaged
in the private practice of law. Therefore, this site is no longer
being maintained, may not be accurate, and should not be relied
upon. It is not now and was not ever intended as legal
advice. It is being provided for historical purposes, and for the
benefit of those lawyers who are capable of independently verifying the
information and judging the opinions in it, and then reaching their own
conclusions. You are strongly advised to consult qualified legal
counsel
before adopting any of the ideas or suggestions in this material, which
may or may not be applicable in your jurisdiction or to your specific
situation, and may no longer be accurate or prudent in any case.
The opinions and statements at this site were solely my own. They
were not and are not those of, nor were they nor are they made on
behalf of, any agency of government or anyone else.